An Athenian withdraws euro bank notes from an ATM for the first time, January 2002. (Courtesy Reuters)
The global financial crisis has revealed flaws in the European monetary union that make it seem more like a political construct than a coherent economic project. These problems have proved particularly painful for the peripheral eurozone countries, including Greece, which have found themselves with uncompetitive exports and massive debt.
But the euro was a good idea for Greece when the country decided to join, and it can still be saved. As the Greek finance minister from 1994 to 2001, I steered my country into the common currency club -- and to this day, I believe it was the right decision.
Why did Greece seek to join the economic and monetary union? Greece’s economic performance after the oil shock of the early 1970s was poor: it faced slow growth, high inflation and unemployment, huge fiscal deficits, increasing debt, a declining currency, and inadequate infrastructure. The government’s lack of macroeconomic discipline and its tendency to succumb to populist demands and vested interests accounted for much of the country’s economic weakness until the mid-1990s. The restoration of democracy in 1974 consolidated human and political rights and promoted social justice, but it failed to modernize the Greek economy.
In the minds of the country’s progressive elites, entering the economic and monetary union seemed the ideal solution to Greece’s fiscal woes. The theory was that the common rulebook of the eurozone would create a system of carrots and sticks that would induce the political system to pursue longer-term goals such as productivity and employment growth and thus respond to the country’s real needs.
At first, events played out according to plan. During the period of Greece’s accession to euro, from 1994 to 2000, its economy was rapidly stabilized, as both inflation and the fiscal deficit decreased drastically. Businesses and consumers became more confident, investment picked up, and the government put in place a package of liberalizing reforms.